Global economic modulation: identifying the signs
G7 Issue

Global economic modulation: identifying the signs

Russia’s full-scale invasion of Ukraine has raised questions about how well our current economic models can work amid the major changes and analytical challenges it caused and what G7 leaders at their Hiroshima Summit should do in response. The challenge has been compounded by new standards of corporate governance, which have considerable impact on Russia, China, Japan and Asia. The answers thus far are as follows.

First, based on the experience of the 1970s, macroeconomic policy should be aimed at controlling expected inflation rates.

Second, developed countries’ ‘zero interest rate’ policy to avoid economic contraction due to the Covid-19 pandemic has been called into question, but premature conclusions should not be made.

Third, the crisis in Ukraine could be directly linked to a crisis in the European Union for countries with excessive national debt relative to the size of their economies. Within the EU, what conditions would allow a ceasefire in Ukraine?
And for Japan, with its large outstanding national debt, how does the Ukraine crisis feed back into
its market?

Fourth, in March 2023, after the collapse of the Silicon Valley Bank, the United States Federal Reserve Bank, Treasury Department and others joined forces to contain the systemic risk. But although Basel requirements focus on large banks, other businesses have found it difficult to apply such standards. What is the market’s assessment here?

Fifth, in our new era of globalisation, in places where there is no decarbonisation, no rule of law, no respect for human rights and rising despotism, how are our predictive models of the global economy affected?

A critical position

Here China’s economic position is critical, especially as it shifted from a zero–Covid-19 policy to a post-zero–Covid-19 policy as 2023 began. Its demand for raw materials imports rose, but its structural recession was exposed by problems in its real estate market and government intervention in Hong Kong. In March, Xi Jinping unveiled his new policy, but the slump in foreign direct investment in China continued, and real estate has not revived.

Russia’s invasion of Ukraine has also increased divisions between the G7-led Global North and the Global South. The invasion caused fuel and grain prices to skyrocket and thus created instability in developing countries highly dependent on importing energy and food. The US, the EU and Japan issued sanctions against Russia based on respect for the rule of law and the protection of human rights. This created a growing gap with developing countries, especially in many countries in Africa, which received important material and technological support from the Soviet Union after their independence. Consequently many African countries abstained from United Nations resolutions condemning Russia.

Moreover, expectations of rising inflation in advanced economies have reversed the trend in developing countries from capital inflows to capital outflows. In particular, tightened money supply in the US could trigger a ‘tantrum’ in developing countries, which would find it more difficult to manage their economies. Although this is not what the US and other developed countries want, no one considers the impacts on developing countries. Disciplining the global economy is also a conceivable consequence of the Global North’s desire to call itself the ‘unipole’ of the Global South.

Far-reaching implications

Russia’s invasion had major implications for China and India, which historically have had deep relations with Russia. Practical considerations also made it unlikely that China or India would be subject to economic sanctions. However, these two countries form the main poles of the Global South. India seems to be acting for itself, playing the democratic card to differentiate itself from China, but not coming so close to the so-called West, represented by the G7, as to break the framework of the Global South.

It will be important to inspect the path of economic spillover into the Global South from the so-called West. China and India, without enough external financial dependence, require different approaches. However, with countries such as Morocco, Thailand and Malaysia increasingly open to the outside world, it is possible to obtain the indicators necessary to capture the major trends in the global economy and to forecast prospects. Interference in economic causality is possible even for countries in the Global South.

At the Hiroshima Summit, Prime Minister Fumio Kishida should do his best to lead his G7 colleagues in avoiding assisting the war-waging capabilities of authoritarian regimes and, most importantly, in establishing decarbonisation measures across borders.